D.C. Circuit Reverses Itself in Murphy

[Famspear]

Dear Steve: Now let's look at some more of your comments:

The only reason you believe as you do is because you want to justify a form of socialism. No money, no socialism.

You don't know anything about me...trying to construct strawman on what I am or what I believe is a sad way to try and pretend you are somehow superior

Steve, this is not about somebody wanting to justify socialism or any other ism. This is not about you feeling inferior to other people. This is about tax protester arguments: Nonsensical arguments that the law is not what it really is.

What does basis have to do with anything....it results in illogical conclusions like the baseball card scenario. So what I didn't pay for it, it was replaced with something because I lost it. I had something I lost it, someone compensated me for my loss. The jury considered it a fair replacement.

Uh, Steve, "basis" is a legal term. It's a term found in something called the Internal Revenue Code, in numerous places. "Basis" is so "basic" (so to speak) that if you don't understand the concept or you don't accept the concept or you are delusional to the point that think that the concept of basis is nonsense, you can never understand U.S. Federal tax law. I didn't make up the term "basis," and I didn't make the rules about how basis amounts are determined.

"So what I didn't pay for it" is not a legal argument, Steve. The issue here is: What is the tax law? Not, what does Steve think a good tax law should look like?

Even if you want to use the nonsensical "basis" bs, it costs a hell of a lot to achieve the age of 50 or whatever the person was. It certainly wasn't free. There's you basis.

Steve, the concept of "basis" is not "nonsensical," and it's not a question of whether someone wants to "use" it. The question is: what does the law say? The law says gain equals amount realized less adjusted "basis." That's the legal term used in the Code. I didn't make that up last weekend with a couple of buddies down at the local bar.

By law, the personal living expenses (section 262) you incur to reach the age of fifty are not part of your "basis" in any piece of property or in anything else. Indeed, when it comes to emotional distress, there is no "property" (tangible or otherwise) that can be the subject of emotional distress. Personal living expenses are non-deductible EXPENSES, not additions to "basis." The only thing here that is "nonsensical" is your personal approach to deciding what tax law is.

Even a parent should explain to their children why something is wrong otherwise the child, especially when they get older, has no incentive to accept their parents authority. Your comment reflects your beliefs though, government being your parent. The government is here to serve the people not control them. This is the distinction between most of you and I.

No, Steve, that is not the distinction between you and I. The distinction between you and I is that you are rambling about explaining to children why something is wrong, and you are deluding yourself into thinking that this is relevant to whether a personal injury recovery is economic income or whether it's taxable as income. "Parents." "Authority." Government being here to serve the people and not control them? Come on.

The distinction is that you are delusional and I am not. It's as though you and I are talking in different worlds, in different universes. You are arguing with me using these terms like "parents" and "authority" and government control. U.S. Federal income tax law has nothing to do with "parents" and "authority" and "control."

Steve, I am no psychologist, but I suspect that you are engaged in something that psychologists call "transference" when you ramble about "parents" and "authority" and "control" when you're supposed to be talking about tax law. Now, that's just my personal opinion. A trained psychologist or psychiatrist might come in and tell me I'm full of baloney on this point -- and if he or she does, I'm not going to go delusional and start believing that psychology is what I say it is just because I have supposedly figured it out based on my sense of right and wrong. I have no training or expertise in psychology, and I know my limits.

United States law is not what you believe it is just because you have used your "logic" to supposedly figure it out, any more than the determining the capital of the State of New York can be based on what you believe or what "logic" you use. U.S. law, like the fact that Albany is the capital of New York, has objective reality -- regardless of what you feel about it. Merely "wishing" Rochester to be the capital of New York does not make it so, no matter how "logical" you feel your argument is.

It doesn't take a genius to realize taxing someone's damages, replacement for something lost, as gain is unfair and unjust. Spin it however you like by using something illogical and nonsensical like "basis" if you wish. I'll keep my feet firmly planted in reality while you are brainwashed in to believing reality is really found in some opinion concocted by those who work for, paid by, and appointed by those wishing to take your money.

Is that it, Steve? Is that your answer? What do you think would happen if engineers approached building a bridge this way? Or if doctors approached the task of brain surgery this way? This is your approach to understanding tax law? Are you really so delusional that you really believe that 99.9% of all the tax law experts for the past 90 years have been brainwashed, and that you have your feet "firmly planted in reality" on what the tax law is? Ask yourself how you have you worked yourself into this box.

--Famspear

[natty]

No one can know whether a jury award for damages is gain to the recipient without knowing the basis of the recipient.

What if the recipient is priceless? And the jury award is merely making the recipient whole, ie., replacing what was lost? Then the jury award is offset with what was lost; hence, no gain. The basis didn't even enter the equation.

Which is the issue the DC Circuit insisting on evading, but which any tax law student in the 25th percentile would understand.

Any tax law student in the 10th percentile would understand there is always exceptions to every rule.

Perhaps if Murphy had argued that even if her award must be included in gross income, she was still entitled to a deduction in an equal amount for her loss. Of course, that would merely be arguing her award was not income from a different perspective.

What the DC Circuit did was fall for the govt lawyers' crap that whether or not it was income was irrelevant. Congress could still tax the award as a transaction tax that does not require apportionment.

[natty]

The government can tax anything, that's a given. How they can tax it provides an inherent limitation.

The govt can't tax exports from any State; but what is the "inherent limitation"? Congress could impose a $10K capitation on every man, woman and child. Apportionment limits that tax in absolutely no way.

Using the court's opinion I can't show a limitation, because the courts have basically given congress carte blanch to tax anything and everything anyway it wants. I can by logic and reason though. If direct taxes provide no limitation then why does the government do everything is can to avoid calling something direct?

You sure have a funny logic and reason. Your question presupposes some type of corruption. Logic and reason says you are avoiding answering how apportionment and uniformity limits Congress' power to tax.

[Famspear]

What if the recipient is priceless? And the jury award is merely making the recipient whole, ie., replacing what was lost? Then the jury award is offset with what was lost; hence, no gain. The basis didn't even enter the equation.

There's just one small technical problem with that argument; it's not the law.

This has already been covered. Murphy received an economic recovery (money) to compensate her for a non-economic loss. The money was a REPLACEMENT. Had Murphy received a "deletion" of her emotional distress, the "deletion" she "received," as (arguably) a non-economic "receipt," might have been non-taxable.

That's not what happened. Instead, she received money (an economic recovery). In exchange, she gave up her right to any further recovery. She can't just keep recovering $70,000 over and over and over. So clearly, she gave up something in order to receive her $70,000. The question is: What is the AMOUNT she can deduct? She has no tax basis in the "lawsuit." She has no tax basis in her "emotional well being." So what amount is she going to deduct against the $70,000.

The correct answer is that the amount of her basis is zero. It is legally nonsensical to say "basis didn't enter the equation" - unless you take the position that her right in the lawsuit was not a property right. No property right, no need to consider basis.

Oops, where does that leave us? If her right to recover is just a personal right (a non-property right), there can be no basis amount. There is no such thing as a "basis" in a "personal" right.

To say that she can somehow manufacture, out of nothing, a magical $70,000 deduction based on the "emotional well-being" she "lost," and then use that magical deduction to offset the actual $70,000 in money she received is, again, nonsensical.

--Famspear

[Famspear]

Perhaps if Murphy had argued that even if her award must be included in gross income, she was still entitled to a deduction in an equal amount for her loss. Of course, that would merely be arguing her award was not income from a different perspective.

Again, that's nonsensical. If her award must be included in gross income, then she must be entitled to a deduction in an equal amount? Based on what rule of law?

If a huge nugget of gold worth $100,000 falls into my back yard, having arrived as a meteor from a distant planet, I can claim an offsetting deduction of $100,000? Based on what law?

Deductions are a matter of "legislative grace." If there's no statute allowing the deduction, there's no deduction.

There is nothing in the Internal Revenue Code that provides for a deduction equal to the amount recovered in connection with a personal injury. There is nothing in the Constitution or in case law that provides for any such deduction. Where is the right to the deduction going to come from?

[natty]

If her right to recover is just a personal right (a non-property right), there can be no basis amount. There is no such thing as a "basis" in a "personal" right.

To say that she can somehow manufacture, out of nothing, a magical $70,000 deduction based on the "emotional well-being" she "lost," and then use that magical deduction to offset the actual $70,000 in money she received is, again, nonsensical.

--Famspear

She did not "manufacture" the loss. The jury determined, ie., found the loss to be the amount of the award. They could have awarded her $10 million, then her loss would have been $10 million. Whatever the amount, the amount made her whole and restored her to her original position before the damage.

[natty]

Perhaps if Murphy had argued that even if her award must be included in gross income, she was still entitled to a deduction in an equal amount for her loss. Of course, that would merely be arguing her award was not income from a different perspective.

Again, that's nonsensical. If her award must be included in gross income, then she must be entitled to a deduction in an equal amount? Based on what rule of law?

It's based on the definition of 'income'.

If a huge nugget of gold worth $100,000 falls into my back yard, having arrived as a meteor from a distant planet, I can claim an offsetting deduction of $100,000? Based on what law?

Huh? Where is the loss? You are comparing apples to oranges.

Deductions are a matter of "legislative grace." If there's no statute allowing the deduction, there's no deduction.

There are deductions granted at the largess of Congress, then there are deductions/losses/costs necessary to calculate the gain. Apparently, since this Murphy decision, the definition of income no longer matters.

There is nothing in the Internal Revenue Code that provides for a deduction equal to the amount recovered in connection with a personal injury. There is nothing in the Constitution or in case law that provides for any such deduction. Where is the right to the deduction going to come from?

Maybe the issue has never come up until Murphy. Congress usually has provided the necessary deductions by statutes whereby only income has always been taxed.

[Famspear]

She did not "manufacture" the loss. The jury determined, ie., found the loss to be the amount of the award. They could have awarded her $10 million, then her loss would have been $10 million. Whatever the amount, the amount made her whole and restored her to her original position before the damage

In the example, if the jury verdict is for $10 million, and the court renders judgment for that amount, then yes that's an assertion that the "loss" was worth 10 million dollars. Now, where is the DEDUCTION for that loss going to come from?

Under the tax law, the mere fact that you have a "loss" does not mean that you can deduct that loss. To be entitled to deduct a loss, you need a law allowing that deduction. No one is saying she "manufactured" the loss. The question is: Can she "manufacture" the right to a deduction for that loss, or does she have to have a legal ground for the deduction. The answer is that she must have a legal ground for the deduction.

Example: Suppose I buy home, a personal residence, for $100,000 and I use it strictly as my personal residence. It's a nice neighborhood, but over the years the neighborhood deteriorates. Crime comes in, and the value of all the homes goes down. I try to sell the home years later and the most I can get for it is $80,000, so I sell it to a stranger for that price.

What I have is a $20,000 realized long-term capital loss. Is the loss deductible for Federal income tax purposes?

Answer: No. The loss is not in connection with a trade or business, and it's not a loss on property held "for the production of income." It's not an investment loss (like loss on the sale of stock) either. A loss on the sale of a personal residence is simply non-deductible.

A loss is not deductible merely it is a "loss." There is no special rule making a loss on the sale of a personal residence deductible, and there is no special rule making a loss due to emotional distress deductible either.

The loss due to emotional distress is even more problematic, though. When the tax code talks about "losses" and deducting those losses, it's talking about ECONOMIC losses. When I buy a house for $100,000 (giving me $100,000 in cost basis) and I later sell it for $80,000, the $20,000 is an ECONOMIC loss.

The term "loss" when used in connection with emotional distress is different. It's not an "economic" loss. No money went away or disappeared, no other property was stolen or vanished or whatever.

The confusion on this subject of recovery for personal injury is wrought by what some legal logicians refer to as "whole word equivocation." You are equivocating on the use of the term "loss." In one place, you are using "loss" to refer to a diminution in economic value. In the other, you are using the term "loss" to refer to emotional distress.

The argument that because the "value" of the $70,000 money recovery is equal to the "value" of the emotional distress "loss" and that somehow the taxpayer has no net gain or has "broken even," if you will, is fallacious. The argument essentially suffers from the same defect as the argument made by some tax protesters to the effect that wages are not taxable because there has been an exchange of "equal value."

One version of this fallacious argument is that the "benefit" I as a wage earner gave to my employer was $1,000 of services, and I received in return $1,000 in money - an equality in value. So far the argument is good.

But then the protesters say, well, since there is an equality in value, there must be no "gain" or no "income."

Ooops. Gain (or income, or whatever you want to call it) is not determined by comparing the current VALUES of the two things being compared. If it were, there could never be any income in any ordinary arms-length, fair market value transaction.

Gain, (or income, by whatever name the tax protesters want to call it) is realized in a disposition of property where the amount received (the amount realized) exceeds the BASIS in the property disposed of. Basis and current value are two different concepts, and the two amounts are usually not the same.

By law, a worker has no "basis" in his or her own labor. All the cash disbursements for food, etc., that went into building the muscles or brainpower or whatever he or she used to perform the labor were expenses - and worse, they were non-deductible (sec. 262).

Similarly the cash disbursements (whatever they were) that went into "building" one's emotional well-being over the years, were non-deductible personal expenses, not "additions to basis." For emotional distress, there is no "basis bank" if you will, that a taxpayer can go to in order to find a deduction to offset against the amount realized on the settlement.

[Famspear]

Famspear wrote:

If a huge nugget of gold worth $100,000 falls into my back yard, having arrived as a meteor from a distant planet, I can claim an offsetting deduction of $100,000? Based on what law?

Natty wrote:

Huh? Where is the loss? You are comparing apples to oranges.

Bingo! And the same is true of comparing a loss on the sale of a house (an economic loss) with the "loss" in connection with emotional distress. It's apples and oranges. Emotional distress is not an economic loss. Maybe you can call it an emotional loss - a loss of mental well being. Not only is there no basis to deduct, there's no economic loss at all.

Think. If there were some magical "loss amount" that you could automatically deduct merely because of emotional distress, then why couldn't you just deduct that loss on your tax return (say, for example, in the situation where you were too sick or poor to hire a lawyer to recover money to "cover" your "loss"). If you could deduct an "amount" of "emotional loss" against the the recovery you eventually win in court, why can't you just forego the recovery (the "income" side of it, if you will), and just deduct the "loss" against whatever other income you happen to have?

Non-economic losses are not deductible, just as non-economic income is not generally taxable.

If non-economic income were taxable, then the joy, the emotional well-being (essentially, the opposite of emotional distress) you receive at the birth of your son, or at the wedding of your daughter, or at seeing the success of your nephew in graduating from medical school would be INCOME that would be taxable to you.

The joy, the increase in emotional well-being that you experience in life is not "income" in the economic sense, and certainly is not "income" in the tax law sense.

Similarly, the "loss" you suffer in the form of emotional distress when sad things happen, while certainly REAL, is not an economic loss, and there is no law allowing you to deduct that loss. To argue that, for Federal income tax purposes, you can somehow deduct that non-economic loss against the money you receive in COMPENSATION for that loss is a fundamental error.

--Famspear

[grixit]

Hey look, a serious argument with the participants attempting to support their positions with facts and logic! If the Lost Horizons folks were here, they'd think they were hearing alien speech.

[LPC]

The seminal Supreme Court decision on capital gain as "income" is Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918), which was a question of statutory interpretation under the Corporate Excise Tax Act of 1909.

The Supreme Court identified several regulations that "correctly interpret" the meaning of "income" as used in the statute, and quoted one of them in footnote 2:

Sale of Capital Assets.-In ascertaining income derived from the sale of capital assets, if the assets were acquired subsequent to January 1, 1909, the difference between the selling price and the buying price shall constitute an item of gross income to be added to or subtracted from gross income according to whether the selling price was greater or less than the buying price. If the capital assets were acquired prior to January 1, 1909, the amount of increment or depreciation representing the difference between the selling and buying price is to be adjusted so as to fairly determine the proportion of the loss or gain arising subsequent to January 1, 1909, and which proportion shall be deducted from or added to the gross income for the year in which the sale was made.

The opinion explicitly rejects the argument that all of the proceeds of the sale of a capital asset should be included in income, but also implicitly rejects the idea that none of the proceeds should be considered income.

[LPC]

If her right to recover is just a personal right (a non-property right), there can be no basis amount. There is no such thing as a "basis" in a "personal" right.

To say that she can somehow manufacture, out of nothing, a magical $70,000 deduction based on the "emotional well-being" she "lost," and then use that magical deduction to offset the actual $70,000 in money she received is, again, nonsensical.

She did not "manufacture" the loss. The jury determined, ie., found the loss to be the amount of the award. They could have awarded her $10 million, then her loss would have been $10 million. Whatever the amount, the amount made her whole and restored her to her original position before the damage.

You've misunderstood Famspear's point. The question is not whether or not there is a loss for which there should be compensation, but whether there should be a deduction for a compensated loss.

For example, suppose that I buy a building for $1 million and sell it for $10 million. I obviously have a $9 million gain. I no longer own the building, but I have $10 million in cash, $1 million of which represents what I originally paid for the building and $9 million of which represents gain (which is considered income).

Now let's suppose that some burns down my building, either deliberately or accidentally, and I sue that person (or my insurance company) for the value of the building, which was the same $10 million I could have gotten if I had sold it. And let's suppose that I win, and get $10 million in cash. Before I got the $10 million in cash I had lost $10 million in value. Once I got the $10 million in cash, the loss was gone and I was whole.

Now, you could have a tax system in which the $10 million from the voluntary sale is treated differently from the $10 million from the involuntary conversion (i.e., the fire and resulting lawsuit), but there is no economic difference between the two situations and, under our tax system, there is no tax difference. In both cases, I have a return of capital of $1 million, which is not income and is free of income tax, and gain of $9 million, which is taxable.

Now, instead of a building, let's suppose that I have a reputation that is worth $10 million. The reason that my reputation is worth $10 million is that I can earn income from personal endorsements, personal appearances, and other transactions in which I am basically selling or renting my reputation to others. Those endorsement contracts obviously produce income for me. Suppose someone libels me, damaging my reputation and ending the endorsement contracts, and I sue them and recover $10 million in cash. Why isn't the $10 million income in the same way that the proceeds of the endorsement contracts were income? Admittedly, the endorsement contracts represent a voluntary sale of my reputation, while the libel represents an involuntary conversion, but as I explained above, that shouldn't make any difference.

My point (which is the same point made by Famspear, Caligari, et al.) is that saying that there is a loss for which a court award is compensation does not answer the question of whether there is gain or income from the court award. In calculating gain, the question is ALWAYS whether the compensation for the thing lost is more or less than the COST (i.e., basis) of the thing, not the value of the thing.

[LPC]

If her right to recover is jus a personal right (a non-property right), there can be no basis amount. There is no such thing as a "basis" in a "personal" right.

That's not exactly true if you consider a reputation to be a "personal right," because corporations often carry "goodwill" as an asset, representing an amount paid in some way for a tradename with value, or for an increase in the value of the tradename. If a libel destroyed the value of the tradename, the corporation should be able to treat at least part of the proceeds of the libel action as a recovery of the basis in goodwill. (Please be clear that the basis I am talking about is the *cost* of the goodwill and not its value.)

Theoretically, an individual might be able to capitalize the costs of creating a good reputation, but I doubt if the capitalization would have any tax significance unless (a) it was part of a trade or business and (b) there were records substantiating the basis for the reputation. I suggest those two conditions because of the rule disallowing deductions for personal expenses, so I would think that a person would not be allowed any basis in a reputation unless the person could show that they properly capitalized amounts paid that would otherwise have been deductible (i.e., arising out of a business transaction). For example, an actor could (theoretically -- maybe) capitalize the costs of ads in Variety promoting his Oscar nomination, on the grounds that the ads were not intended to produce any current income but to increase his/her reputation in order to increase his/her market value. I don't think anyone has ever capitalized anything that way, but it makes some sense as an accounting matter.

[Famspear]

SteveSy wrote:

Unlike you I'm not stuck in a world where my common sense is defined and manufactured based on the lastest [sic] legal decision. Cases like the Charles River Bridge case were obvioulsy [sic] wrong based on common sense.

You know, this is one of the benefits of dealing with tax protesters as a hobby. The case of Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. (11 Pet.) 420 (1837), just doesn't come up often enough in my daily tax practice.

Of course, my common sense is not defined by the latest legal decision. I, like 99.9% of all lawyes, use the logic of legal discourse as part of legal analysis. I use "common sense" when I'm trying to figure out whether to use a hammer or a saw to put more nails in that rickety fence in my back yard.

[Imalawman]

If her right to recover is jus a personal right (a non-property right), there can be no basis amount. There is no such thing as a "basis" in a "personal" right.

That's not exactly true if you consider a reputation to be a "personal right," because corporations often carry "goodwill" as an asset, representing an amount paid in some way for a tradename with value, or for an increase in the value of the tradename. If a libel destroyed the value of the tradename, the corporation should be able to treat at least part of the proceeds of the libel action as a recovery of the basis in goodwill. (Please be clear that the basis I am talking about is the *cost* of the goodwill and not its value.)

Theoretically, an individual might be able to capitalize the costs of creating a good reputation, but I doubt if the capitalization would have any tax significance unless (a) it was part of a trade or business and (b) there were records substantiating the basis for the reputation. I suggest those two conditions because of the rule disallowing deductions for personal expenses, so I would think that a person would not be allowed any basis in a reputation unless the person could show that they properly capitalized amounts paid that would otherwise have been deductible (i.e., arising out of a business transaction). For example, an actor could (theoretically -- maybe) capitalize the costs of ads in Variety promoting his Oscar nomination, on the grounds that the ads were not intended to produce any current income but to increase his/her reputation in order to increase his/her market value. I don't think anyone has ever capitalized anything that way, but it makes some sense as an accounting matter.

I think that under the regs for an asset sale of a business when you've allocated a portion of the purchase price to goodwill that you'd have a basis in that goodwill. After all, you would be amortizing that goodwill, so it seems only right that you would get a basis the goodwill for the cost that was paid for that item. But as you pointed out, we're talking about cost, not value.

[Famspear]

You could argue that there's no discrepancy, as follows. Purchased business goodwill is a property right, not a personal right, while the reputation of an individual is a personal right.

Purchased goodwill in an arms-length transaction is essentially the excess of cost over the sum of each of the fair market values of each of the individually identifiable net assets acquired. Purchased goodwill arises only in connection with an asset acquisition, a property acquisition (indeed, even if all the assets acquired were "intangibles").

If it's truly a fair market value acquisition - a transaction between a willing buyer and a willing seller, neither being under the compulsion to buy or sell, and both having reasonable knowledge of relevant facts - then the "excess" paid for the assets must somehow be an additional intangible property right (goodwill) that is peculiar to the particular business being purchased.

By contrast, an individual's right to his or her good name is not usually thought of as a "property" right. Reputation does not generally arise as a result of a "purchase" of any property (tangible or otherwise).

In other words, maybe the difference is not merely that a capitalizable cost was incurred the former but not the latter, but also that in the latter there was no acquisition of property at all.

That might not be a completely satisfactory explanation, however, and LPC's points are well taken.

--Famspear

[Duke2Earl]

Actually, an individual can have personal goodwill. See a case named Martin Ice Cream.

[natty]

By law, a worker has no "basis" in his or her own labor. All the cash disbursements for food, etc., that went into building the muscles or brainpower or whatever he or she used to perform the labor were expenses - and worse, they were non-deductible (sec. 262).

Similarly the cash disbursements (whatever they were) that went into "building" one's emotional well-being over the years, were non-deductible personal expenses, not "additions to basis." For emotional distress, there is no "basis bank" if you will, that a taxpayer can go to in order to find a deduction to offset against the amount realized on the settlement.

Again, this is apples and oranges. A worker does not realize a loss in his human capital just because he works. (That is the fallacy of the argument of the TPs.) All of the non-deductible living expenses merely maintain, and in some cases improve his capital value as a worker.

But what if that worker loses a leg while working, then through an insurance settlement, is compensated for the loss of his leg. Is the compensation income? Does he get to deduct the loss of his leg just because Congress grants him the deduction? Doesn't the compensation merely replace the human capital that was lost?

I disagree. There is a "basis bank" that is intangible and priceless. It is everything that went into making you who you are. It is your education, your health, your well being, your reputation. All of the non-deductible living expenses that went into building your "capital".

If you want a tangible analogy, it is no different than owning a house that burns to the ground. You agree to an insurance settlement that allows you to build a new house that replaces the house that was lost. Would you argue that this compensation was taxable income or that you could not offset the compensation by the lost house? But that is exactly what the Murphy decision has held. The insurance settlement is gross income, not because you realized a gain; but because the insurance settlement was a transaction that was fully taxable.

[natty]

My point (which is the same point made by Famspear, Caligari, et al.) is that saying that there is a loss for which a court award is compensation does not answer the question of whether there is gain or income from the court award. In calculating gain, the question is ALWAYS whether the compensation for the thing lost is more or less than the COST (i.e., basis) of the thing, not the value of the thing.

Perhaps the difficulty with accepting the "human capital" argument is that 1) the costs are often intangible (how much did you pay for your education? what living expenses built your human capital?, etc.) and 2) it is almost impossible to calculate the loss of human capital separate and apart without considering the loss of potential earning capacity.

Nevertheless, it can not be denied there were COSTS in building "human capital", thus forming a basis; then any compensation that merely replaces that capital, however abstract, is not income.

The Murphy court on rehearing evaded the "human capital" argument, then I suppose, left it up to Congress to determine whether or not to allow any deductions. Congress can now tax the whole compensation amount simply because it was a "transaction".

[Quixote]

Would you argue that this compensation was taxable income or that you could not offset the compensation by the lost house?

It is income to the extent the insurance proceeds exceed the owner's basis in the house.

But that is exactly what the Murphy decision has held. The insurance settlement is gross income, not because you realized a gain; but because the insurance settlement was a transaction that was fully taxable.

I don't think that's what Murphy said at all. The Murphy court did not hold that all transactions are taxable. Only transactions that give rise to income, in its usual sense, or as defined in the IRC, result in gross income.